Closed-end fund shareholders have traditionally been thought of as individual investors. But when last year's market turmoil sent discounts to record levels, according to a December 2008 survey by Herzfeld Advisers and the Altman Group, "market conditions have caused retail investors to flee closed-end funds and thus paved the way for institutional investors to get their way through increased shareholder activism." The potential immediate profit from open-ending or liquidating a CEF trading at a discount of 15% or so is quite attractive, even though trying to force through changes over the opposition of incumbent fund management resembles medieval siege warfare in its demands on time, resources and strategic planning.

One strategy that individual investors might consider would be to piggy-back on institutional activism, buying those CEF's that seem to be most susceptible to discount reduction action in the near future. The factors that identify target funds might include:

Summary: Closed end funds (CEF) on average extended their gains the week ending 3/20/09. A somewhat similar pattern of price movement played out among the fund types versus the previous week. Average price appreciation of 13 CEF fund types was 1.65%, while the unweighted average for all 648 CEFs was 1.77%. (CEFs in the aggregate YTD are down 0.3%; Distribution Yield was 12.2%; Discount to NAV was 11.3%). Preferred funds, up 14.0% the previous week, were up 4.6% the week ending March 20th. Given the swoon in financial stocks on Thursday and Friday of last week, caution regarding this group should be exercised in the upcoming week.

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Roger Nusbaum submits: I got to thinking it might be interesting to see how some of the low beta, high yielding, defensive investment products came through the recent dip. The following list is not comprehensive; feel free to add any of your own.

• Claymore Sabrient Defender ETF (DEF) was down 3.00% on February 27 and from the close on 2/26 to the close on March 5 it was down 4.97%
• Claymore Yield Hog (CVY) was down 2.33% on February 27 and from the close on 2/26 to the close on March 5 it was down 5.52%
• iShares Dividend Select ETF (DVY) was down 3.21% on 2/27 and from the close on 2/26 to the close on 3/5 it was down 5.15%
• SPDR S&P Dividend ETF (SDY) was down 2.26% on 2/27 and for the same week as the others it was down 4.81%
• WisdomTree High Yielding Equity ETF (DHS) was down 2.80% on 2/27 and down 4.95% for the week measured as above
• Madison Claymore Covered Call Fund (MCN) was down 0.93% on 2/27 and down 1.73% for the week
• S&P 500 Covered Call Fund (BEP) was down 3.80% on 2/27 and down 5.56% for the week
• First Trust Covered Call Fund (FFA) was down 1.60% on 2/27 and down 3.98% for the week
• NFJ Div, Int, Prem Strategy Fund (NFJ) was down 2.91% on 2/27 and down 3.58% for the week
• Macquarie Infrastructure Trust (MIC) was down 1.52% on 2/27 and down 6.0% for the week
• Eaton Vance Enhanced Equity Income Fund (EOI) was down 2.15% on 2/27 and down 3.66% for the week
• Eaton Vance Tax Managed Diversified Equity Income Fund (ETY) was down 0.06% on 2/27 and down 2.35% for the week
• Alpine Global Dynamic Dividend Fund (AGD) was down 3.28% on 2/27 and down 6.26% for the week.
• DB Currency Harvest ETF (DBV) was down 1.75% on 2/27 and down 3.70% for the week.

For anyone who researches their own investments, the closed-end funds would probably be preferable because they won’t have the big sales charge and the recurring 12b-1 fees of the Van Kampen fund. Plus, once again, closed-end funds have the advantage of a stable asset base on which the calls can be written.

Road Hogs by Andrew Bary

• Thesis: Foreign companies are paying billions of dollars to buy U.S. toll roads from some state and local governments. These investors are chasing after the 80% gross margins of operating highways. Local authorities have often been unable to capture these revenues or use them effectively. Some commentators question if major buyers such as Australia's Macquarie Infrastructure Group are paying too much for these assets.
• Quick comment: Macquarie Infrastructure Group Trust (MIC) is an NYSE listed publicly listed partnership. MIC participates in several of Macquarie's infrastructure purchases, and pays $2 dividend on each share.

The general concept of selling call options against your portfolio is just fine—it’s the fact that many people do not grasp the implications of this strategy that bothers me. In particular, I have now seen a number of articles and gotten the explanation from a number of folks that state that the premiums that you collect when you sell covered call options can be regarded as income and treated, therefore, like dividends. This is an enormous misconception and it likely to end in a lot of hard feelings when either (1) the market rallies, or (2) volatility increases. At first, I thought that I did not understand what was going on when I read proposals that treated dividend income and option premium as similar sources of income in the portfolio. I have now seen and heard this explanation a number of times --- I get what these managers are doing -- and the pitch is often patently incorrect. To treat dividends and option premiums as the same thing in looking at a portfolio is an apples and oranges comparison.

As you start to look at these funds, it seems that there are two basic philosophical viewpoints:

Scenario 1: Efficient Market

Nature of the beast: Closed-end funds are offered at a premium to NAV at their IPOs; the premium represents the compensation to the underwriters, although few retail buyers understand this. Afterward, closed-ends frequently fall to discounts in the aftermarket.

Lack of investor understanding: Wachovia Securities analyst Mariana Bush says, "We think investors are selling their funds regardless of their NAV performance, to get rid of holdings whose behavior they cannot fully understand."

Wall Street maneuvers: A 1994 study by the Wharton School of Finance suggested that "enterprising" pros sell these funds to a "less informed" public. More often than not, these premiums disappeared when the underwriters withdrew so-called price support techniques after the offering, leaving the small investors holding the bag... Thomas J. Herzfeld places the blame for the current depressed prices squarely on Wall Street. "The underwriters pumped out whatever they could sell leaving no demand for these shares in the aftermarket."

Overly-high risk in pursuit of high yields: "Most of these funds have little or no chance of returning their eight, nine, ten percent yields without depleting their respective net-asset values," says another Chicago options trader.

The Businessweek dated July 4 has an article (I don't know if I utilized my subscription to access the article) about closed end funds that sell call options to create income, writes Roger Nusbaum. I have written about this product numerous times because I think it can be useful in a properly diversified portfolio.

My wife spent Friday night at a family function that I got out of because our new puppy needs a human present most of the time. So for fun I watched the Diamondbacks game and plugged the term covered call funds into Yahoo Finance to see what I would find.

Any ETFs or Closed-End Funds that we haven't covered that you think we should? Leave a comment below.